What Is Inventory Financing and How Does It Work?

A company goes into different business deals involving the purchase of inventory for sale. One of these transactions is the use of a short term loan called inventory financing. The financing firm acquires the inventory stock on behalf of the buyer from the manufacturer. The physical inventory is then given to a committed business who will sell these inventory stock. The funds gained from the sale is used to pay the firm for the inventory financing.

A business with high cycle count inventory is qualified to avail this type of financing from financing firms. The following information shows how an inventory financing works and how beneficial it is for businesses.

How Does Inventory Financing Work?

Inventory financing is usually not the first option of a business when it comes to financing since inventory financing is more expensive compared to other business loans. But there are instances that lead a business to try inventory financing which works like this:

It is usually part of an asset based loan. Inventory financing is one of the example for business loans secured by a collateral, which is the scope of asset-based lending.

The debtor request for funding from the lender. After the debtor buys the goods bought by the lender from the manufacturer, the debtor can make a request for inventory funds from the lender. Various free inventory templates and inventory templates in PDF format show how this request is done and the information to be include on it.

The lender deposits the funds into the debtor’s account. Once the lender receives the request, the approved amount is given to the debtor in the form of a deposit.

The debtor uses the funds for business purposes. The funds received are solely applied for the business activities like sale of products in inventory which regularly settle the transactions between the parties.

Requirements for Inventory Financing

As indicated in some of the sample inventory templates of this website, here are the requirements to be met by businesses like wholesalers, distributors and manufacturers in order to acquire inventory financing, as follows:

Marketable Products – The product inventory you are financing for must be easily promoted and sold to the consumer market.

Good Credit Standing – Your business must have a good credit record to gain the trust of the lender.

Inventory System Method – As the proposing party, you will need to elaborate on the inventory practices you have especially the inventory system and valuation method you employ. inventory templates in Doc

Reliable Financial Statements – Financial performance of the business is also a tool to convince the lender of how well the business is running as well as the business’s growth.

Effective Business Plan – To gain the approval of the lender for your financing request, you must be able to procure an effective business plan on how to make good use of the funds.

Inventory financing can aid the business in keeping a good amount of inventory which can be beneficial during peak and slow seasons particularly applicable to seasonal business types. Try looking into the requirements for inventory financing and check if you can apply this to your business.